KKR & Co. Inc.

Ladies and gentlemen, thank you for standing by. Welcome to KKR's fourth quarter 2020 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following management's prepared remarks, the conference will be open for questions. At that time, if you'd like to ask a question, please press star 1 on your telephone keypad. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Craig Larson, Head of Investor Relations for KKR. Craig, please go ahead.

Thank you, Operator. Good morning, everyone, and welcome to our fourth quarter 2020 earnings call. I'm joined this morning by Scott Nuttall, our co-president and co-COO, and by Rob Lewin, our CFO. We would like to remind everyone that we'll refer to non-GAAP measures on the call which are reconciled to GAAP figures in our press release, which is available on the Investor Center section at kkr.com. This call will contain forward-looking statements which do not guarantee future events or performance. Please refer to our SEC filings for cautionary factors related to these statements. And like previous quarters, we've also posted a supplementary deck on our website that we'll be referring to over the course of the call. Thank you, everyone, for joining us. We hope you and your families are safe and healthy. Our call this morning is organized into three parts. The first relates to where we've been with a focus on our fourth quarter results. We had a strong finish to a solid year, and I'm going to walk you through these. The second part of the call relates to where we're going. Rob's going to lead you through this part of our call. This includes an update on the Global Atlantic acquisition, which closed on February 1st. And additionally, Rob is going to review some important changes in our reporting and compensation framework and also introduce new fee-related earnings per share guidance as part of this. And finally, Scott will offer some thoughts both on our year as well as on our outlook. Turning first to the results in page two of our supplement, you can see that we had a successful year. In the upper left-hand corner of the page, assets under management grew 15% to $252 billion, driven both by investment performance in addition to new capital raised. 2020 was a record fundraising year for us. In turn, management fees grew by 16% year over year to $1.4 billion. Looking at the bottom left-hand corner, book value per share continued to compound. At year end, our book value per share was $23.09. representing a 20% increase from a year ago. And finally, on the bottom right-hand side, after-tax distributable earnings increased 8% to $1.5 billion for the year. When you look at this page more broadly, from 2016 to 2020, we've seen our AUM and management fees grow at compound annual growth rates of 18% and 15% respectively. Book value per share has compounded 17% annually, And remember, in addition to this compounding, dividends are being paid out alongside. And with the growth in the earnings power of the firm and unrealized carry and embedded gains in our balance sheet, both at record levels as of 12-31, we're well positioned to see an acceleration in earnings growth from here. Now let's dive a little deeper into our results for the quarter. Please turn to page three of the supplement, focusing on our revenues. Management fees of $393 million are up 24% compared to the fourth quarter of last year, an increase 9% just from last quarter, driven by fee-paying AUM growths, as well as $22 million of catch-up management fees related to capital raised and strategies that had already begun investment period. Net transaction and monitoring fees were up nicely. Capital markets fees of $193 million is the strongest quarterly figure we've reported in two years. Fees here continue to be diversified across geographies with a little over 40% of revenues for the quarter and the year coming from each of the U.S. and Europe with about 15% coming from Asia. And realized performance income and realized investment income totaled $392 million. That number is right on top of the $390 million update we issued in December. Notable contributors this quarter. include monetizations at Fiserv and Epicor, as well as just over $100 million in incentive fees and martial waste. On a blended basis, our key exits this quarter were done at over two times cost. Turning to our expenses, compensation, including equity-based comp, was $376 million, implying a 35% compensation margin for the quarter, and bringing our comp margin for the year to 38.7%, well inside of the low 40s total comp ratio we discussed on these calls now for some time. You did see a modestly greater skew towards equity-based comp in the quarter as we issued some stock to employees as part of our year-end comp process. And remember, as always, our intent is to repurchase shares and offset dilution from shares issued to employees over time. Non-compensation operating expenses came in at $124 million, essentially flat year-over-year. So for the quarter, we're reporting after-tax distributable earnings of $431 million, or 49 cents per share, up 11% on a per-share basis relative to Q4 of 2019. And looking at the results for the full year on the right-hand side, we're really proud of the results you see on the page. Despite all of the market volatility and challenges over 2020, management fees increased 16%, capital markets fees increased 17%, Aggregate revenues increased 8%. And with 150 basis points of margin improvement, operating earnings were up 11%. And while after-tax DE per share for the year compares favorably to 2019, it's worth noting that we completed the majority of our financings related to Global Atlantic in Q3, which has burdened our after-tax DE per share in advance of the revenues and earnings associated with the acquisitions. And in addition to these P&L metrics, you've seen continued acceleration in our fundraising. New capital raised in 2020 totaled $44 billion, a 72% increase compared to 2019. More on this in a couple of minutes. Moving to page four, you see our investment performance. This has continued to be a real strength for the firm. In 2020, our flagship private equity funds returned 32%. well ahead of the 17% and 18% total return figures of the MSCI world and S&P 500 indices. Performance here was strongest in the Americas. Driven by a number of digital and tech-oriented investments, as well as strong performance in some of our carve-outs, America's 12 appreciated 48% over the year. In real estate, our flagship opportunistic funds appreciated 8%, which compares quite favorably to its benchmark, which appreciated 1%, and negative performance across major REIT indices. And our infrastructure three funds had a gross return of 3% well above its benchmark, which declined 7% in 2020. And our more mature infrastructure two fund had an excellent year, appreciating 34% driven by a number of sizable modernizations. Our alternative credit flagship funds had a strong Q4 of 9% for the quarter to finish flat for the year. And as an update, our dislocation fund, which we launched in the midst of the pandemic, has continued its strong start, up 60% in the fourth quarter, and for the year is up over 50% on an unannualized basis. In leveraged credit, which is the largest of our credit businesses by AUM, the composite was up 7% for the year, compared to 3.8% for the LSTA. Looking at page five of the deck, Investment performance has helped us continue to raise capital. We raised $12 billion in Q4 and a record $44 billion for the year, up over 70% from 2019. Notably, we brought in $17 billion of AUM for our Asia strategies in 2020, representing almost 40% of new capital raised. Asia real estate and Asia infrastructure both held their final closes in Q4, wrapping up two very successful first-time fundraisers for us. And on top of our success in Asia, we've grown our core platform this quarter with capital raised in core PE, as well as the first dollars raised in our new core infrastructure strategy. And it's worth highlighting the continued scaling of the real estate platform. Driven by new capital raised in our Asia and America's opportunistic strategies, as well as core plus real estate, AUM across the platform has increased from 9 billion a year ago to over 25 billion pro forma for GA. And we continue to have a lot of growth opportunities ahead of us. We're highlighting this on the right-hand side of the page. Looking at strategies in the market or expected to come to market over the next two years, we have four flagship strategies, 20-plus additional strategies, with GA on top of that. And I have two final items to touch on before turning the call over to Rob. First, consistent with historical practice, we're pleased to announce an increase in our annual dividend per share from 54 to 58 cents. This change will go into effect beginning with any dividend to be announced for the first quarter of 2021. And second, we're excited to announce that we'll be hosting a virtual investor day the morning of April 14th to discuss our business in more detail and also focus on the growth we see over the coming years. We hope that you'll be able to join us then. And with that, I'd like to turn the call over to Rob.

Thanks a lot, Craig. Turning our attention to Global Atlantic, as announced last week, we closed on our acquisition of GA on February 1st and wanted to provide some key updates. Between signing and closing, assets at GA have increased significantly. We had an oversubscribed equity co-investment process that allowed us to bring down our ownership to approximately 60%, our desired level, while raising primary capital for GA at the same time. The long-term impact that we expect GA to have on our financials has increased considerably compared to the figures discussed when the transaction was announced in July 2020. And most importantly, we continue to work exceptionally well with the broad GA team. Let me spend a few minutes on some of the details. First, in terms of GA's footprint, AUM has increased from $72 billion at announcement to $90 billion at 1231, an increase of roughly 25%. This growth in AUM between signing and closing was well ahead of our expectations. The strength of GA's platform was clearly evident in both its individual channel. GA has strong and better relationships here with over 200 banks and broker-dealers, in addition to its institutional channel, where it's a leader in block, pension risk transfer, and flow reinsurance. Of particular note, GA reinsured over $16 billion in three separate block acquisitions in the third and fourth quarters of 2020. so the fundamentals of the business we acquired remain compelling. Slide six of the supplement updates you on what this asset growth does for some of our important operating metrics. Taking a look at the top half of the slide, you can see the impact on KKR's AUM, which increases 36% to $342 billion. As all of these assets will immediately hit our fee-paying AUM, this acquisition results in a 48% increase in that figure from $186 billion to just over $275 billion. We now manage approximately $120 billion on behalf of insurance companies and believe we are well positioned to further partner with insurance balance sheets over time. I think the bottom half of this page is particularly worth calling out, as you'll see the transaction increases our perpetual capital by five times, from $22 billion to $112 billion. And we now have 43% of our capital base that is either perpetual or with multi-decade recycling provisions. And 86% of our capital overall will now have a contractual life of over eight years from inception. GA provides more scale, and it does so in a permanent way, meaningfully advancing several important strategic initiatives for us all at once. As GA's investment manager, we are focused on bringing our asset management and origination expertise to bear on behalf of Global Atlantic and its policyholders. GA already had a strong investment track record and an accomplished team of investment professionals. Working together, we believe we can further improve GA's risk-adjusted return profile. Now, as it relates to the transaction itself, GA was acquired for $4.7 billion, or one times book value at close. Following the successful co-investment process that was led by our capital markets team, we now have an approximate 60% interest in GA, and we were also able to raise $250 million of primary capital, which really does set the business up nicely for future organic and inorganic growth. Of the $4.7 billion purchase price plus $250 million primary raise, we funded our share, which is approximately $3 billion, through the $1.9 billion of proceeds raised in our August mandatory convertible and senior note issuances, with the remainder coming from cash on our balance sheet. In terms of our financial results, you'll remember that there are really two ways that GA impacts our distributable earnings. The first are the management fees we generate as GA's investment manager. When we announced the transaction in July, we mentioned that we expect net management fees to increase by at least 200 million over the next couple of years as we wrap up our work with GA. This reflects management fees we earn as GA's investment manager, as well as fees generated on assets that we manage directly. This figure is net of operating expenses, which in part relate to strategies that we aren't investing directly. Given the increase in GA's assets since the announcement of the deal, our confidence around exceeding the $200 million target has certainly increased. The second way that GA impacts our P&L is through our share of their operating earnings. As noted earlier, GA's book value is approximately $5 billion. For illustrative purposes, which could help your modeling, if you assume the 12% to 13% ROE and took our 60% share, that would suggest annual earnings in the range of $360 to $390 million running through our financials. These earnings will show up in our P&L through our insurance segment operating earnings. In terms of our financial reporting, GA is now a majority-owned subsidiary, so we will consolidate their financials into our GAAP earnings starting in Q1. As it relates to our segment results, we will be introducing a new insurance segment that would disclose certain financial information, including our share of their adjusted operating earnings that I just referenced. We'll then use this profitability measure in our walk to KKR total distributable earnings. I'll review a prototype of our segment earnings in just a few minutes. Now, this all leads nicely into the second topic related to some important changes we're making in our reporting and compensation framework more broadly in 2021. Looking at page seven of the supplement, we feel that we have never had better line of sight better visibility into our management fees as we do right now. With GA, we've added a significant stream of perpetual management fees. Additionally, as you heard earlier from Craig, management fees across KKR continue to scale, and we're in the early stages of an active fundraising cycle that includes raises across a number of our larger benchmark strategies. Putting these two dynamics together, we have increased visibility in our fee revenue, as well as meaningful confidence in our ability to scale from here. As a result, we now have an opportunity to change our compensation framework in a way that we think should really benefit our shareholders. Currently, we talk about comp and comp margins as a percentage of our total distributable revenues. Our historical guidance here has targeted a low 40s overall comp margin, but that compensation figure has been a single number based on all forms of revenue. Starting in 2021, we are going to decouple our compensation into its component pieces. Let me walk through the changes to our framework before pulling it all together. Please take a look at page 8. The first piece relates to fee-related compensation. We expect our fee-related revenue to have an annual cash complot in the range of 20 to 25%. To be clear, given our line of sight and outlook around our fee revenues, We believe this range allows for a base level of comp to be paid across the firm in all operating environments, including years where monetizations are more challenged. In terms of our other forms of compensation, for our realized performance revenue, which is primarily driven by carried interest, our range of annual cash comp is expected to be 60% to 70%. Our realized investment income from our balance sheet will have an expected cash comp load of 10% to 20%. We believe this change will benefit KKR shareholders in a number of ways. First, it will enhance the transparency of how our compensation pool gets formed and the profits we derive from our three forms of revenue. It will also create better alignment, as compensation at KKR will become even more success-based and aligned with the realized investment performance of our funds. We think this change is advantageous for both our public shareholders as well as our fund limited partners. And from a P&L perspective, This change delivers a much higher flow-through of our fee-related earnings to our shareholders. We believe this will also provide greater line of sight to the drivers of the growth and margin expansion of our FRE going forward. And finally, we believe this change will make the economics from our balance sheet clearer. Our balance sheet is positioned to generate excellent returns. We have averaged 21.5% over the last two years. And it does so without any fixed expenses, which are all borne by our fee revenues, and now a modest and variable comp load. When you take a step back and compare these characteristics to other balance sheets, we think this is fairly unique. And with continued performance, we believe these attributes will lead to a higher multiple being applied to our balance sheet over time. Now, even though we are breaking out compensation into its component parts, we will continue to track our aggregate compensation margin, including equity-based comp. In a normalized operating environment, you should expect our comp ratio to be roughly in line with our current levels. In an environment where we have elevated levels of successful monetizations, our comp margin is likely to tick up a bit. But in a more challenged environment, where our monetizations are lower, you should also expect to see our comp margins go down, which will provide some level of added protection to our operating earnings. Let me repeat this part, as it's a really important piece to be clear on. These changes are not about increasing compensation on the enterprise. As an example, if we applied the midpoint of our new compensation ranges to our actual 2020 revenues, our compensation margin would have been 38.6%. This compares to our reported comp margin of 38.7% for the year. So this change is really about how our comp pool is calculated and creating more visibility and flow through of our fee revenues to our shareholders, while adding a bit more variability in our comp margin based on our performance. and we are confident we can achieve that while not increasing the overall compensation paid by the firm. In connection with these changes, you'll see that we expect to make a couple of adjustments to our financial reporting to bring it more in line with our peer set and allow for easier comparability for our investors and analysts. The first change is to build to a new simplified fully burdened fee-related earnings figure with individual compensation components as described a minute ago. On this page, you could see KKR's distributable operating earnings as you think of them today, but now titled Asset Management Operating Earnings. This will then be added to our share of GA's earnings to arrive at a total distributable operating earnings line as you work your way towards after-tax distributable earnings. Please note that we've included a more detailed prototype of our segment financial profile and definitions in the appendix on pages 10 and 11. In addition, consistent with our peers, when calculating after-tax distributable earnings going forward, we will no longer include equity-based compensation as an expense. At this point, we believe we are one of the few alternative asset management firms that reflects equity-based compensation as an expense in our reported total distributable earnings. This has been a source of confusion at times, in particular as investors look at relative valuation multiples. So we are going to conform to our peers and make it easier for our shareholders to compare results. Equity-based compensation will, of course, still be disclosed in our earnings release. And as we think about aggregate compensation and comp margins, it will be a key input. But it will not be included within our reported after-tax DE or after-tax DE per share metrics. And finally, let me spend a minute on our fee-related earnings. Given all of our growth avenues and the visibility that I spoke of earlier, we see a clear path for FRE to comfortably exceed $2 per share for 2022. This anticipated growth will be in spite of some large investments we intend to make across technology and distribution and marketing over the next couple of years, which we believe will benefit our FRE and DE well beyond 2022. We know FRE is an important financial metric to our investors, and we intend to provide periodic updates on our progress. And with that, let me hand it off to Scott.